Equity Analysis /
Pakistan

Honda Atlas: Analyst briefing takeaways

  • In their MY20 Analyst Briefing today, HCAR stated that auto demand has noticeably improved post-lockdown (July: +46%yoy)

  • They acknowledge increase in competition for City post-Yaris launch but less competition for Civic from Kia Sportage

  • We have a Sell stance on HCAR (TP of PKR208/sh) due to the 53% rally in the sector; HCAR is trading at a P/E of 41x

Intermarket Securities
13 August 2020

HCAR posted 4QMY20 Net loss of PKR28mn (LPS: PKR0.2), bringing MY20 NPAT to PKR682mn (EPS: PKR4.77) down 43%yoy. HCAR announced a DPS of PKR1.0 for MY20, compared to a DPS of PKR12.15 in MY19. HCAR continued its downward trajectory posting 1QMY21 Net loss of PKR511mn (LPS: PKR3.58) compared to NPAT of PKR1,050mn (EPS: PKR7.36) SPLY.

Key result highlights for MY20:

HCAR sold 22,418 units in MY20, down 54% yoy. Market share fell to 17% in MY20 vs. 24% in MY19. INDU witnessed 1pptyoy attrition to 28% while PSMC’s rose by 8pptyoy to 55%.

Gross margins remained flat in MY20 at 7.4% (vs. 7.7% in MY19), this was led by price increases throughout the year which helped offset a sharp decline in sales volume. Recent uplift in sales (2QMY21) is likely due to pent up demand from the lockdown and simultaneous improvements in the macroeconomic environment.

Finance costs rose significantly from PKR11mn in MY19 to PKR727mn in MY20 due to the high interest rates, sharp increase in borrowings and sharp decline in sales volumes. Other income declined by 51% yoy.

Future outlook:

Following the easing of country-wide lockdown, industry sales have nearly reverted to the January 2020 level in July. HCAR sold 2,003 units in June and 2,467 units in July. Taking into account the improvement in demand due to easing of lockdown, the management expects a reasonable monthly demand for the remainder of the year.

The main objective of the management is to maintain reasonable and healthy margins yoy. For this reason, they will be monitoring the impact of PKR depreciation vs. USD on input costs (as they have been for the past 12-18months). HCAR imports 80% of CKDs and from Thailand and is invoiced in US$.

With regards to competition, the management believes that Civic sales have not been significantly impacted by the Kia Sportage due to the difference in car class (Sedan vs SUV) and overall features of the Civic. The management, however, did acknowledge an increase in competition due to the Yaris launch against the City (the management could not disclose any plans circulating around the new City model).

In order to reduce short term borrowings, the management is aggressively focusing on increasing sales in order to reduce the inventory levels, while also focusing on adjusting new orders with the aim of managing inventory. The plant is currently operating on a single shift basis, with no current plans on operating on a double shift basis.

Due to the clubbing of production and sales of the City and Civic in the PAMA numbers, the management disclosed that the sales are trending closely to historic figures, which are roughly 60:40 in favor of the City. The localization levels in terms of parts is 60% for Civic, 70% for City and 40% for the BRV.

Auto financing sales have a share of 20-30% in total sales for HCAR. With the recent 625bps reduction in interest rates to 7.0%, this number may increase, boosting overall sales for the company.

With the recent 53% rally in the Autos sector since May, we have a Sell stance on HCAR with a TP of PKR208/sh. HCAR is trading at a P/E of 41.0x. Autos sector since May, we have a Sell stance on HCAR with a TP of PKR208/sh. HCAR is trading at a P/E of 41.0x.